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China's Money Market: Central Bank Digital Currency and the Future of Monetary Policy



The article analyzes the key functions of central bank digital currency (CBDC), focusing on whether CBDC payments should be based on central bank accounts or tokens; should cash be abolished, or should the central bank formulate a fee schedule for transfers between CBDC and banknotes; The price index is still a constant nominal value like cash; the impact of CBDC on the central bank's monetary policy strategy and operation; how CBDC affects the interaction between the central bank and fiscal authorities, etc., discusses the future of CBDC and the central bank's monetary policy. 1. How can a CBDC be designed to facilitate its role as a medium of exchange? Currency has four major characteristics, namely, value scale, means of circulation, value storage and means of payment, among which the value scale and means of circulation are the basic characteristics of money. With the popularity of the Internet, many central banks around the world are actively exploring the possibility of establishing a sovereign digital currency. Central bank digital currencies (CBDCs) are fundamentally different from the various virtual currencies created by private entities (such as Bitcoin, Ethereum, and Ripple), whose prices have fluctuated wildly in recent years. Existing literature seems to indicate that the two goals of money as a stable unit of account and an efficient medium of exchange are irreconcilable, but a well-designed CBDC can achieve both goals at the same time. With regard to the role of CBDC as an effective medium of exchange, government fiat currency has inherent characteristics, namely, wide availability and serving as legal tender for all public and private payment activities. But the key question is, should a CBDC be more akin to cash or a debit card? The author's research shows that the cash-like CBDC has major disadvantages, while the debit card-like CBDC can be used as a simple and practically costless medium of exchange, which can be provided directly by the central bank or through public-private partnerships between the central bank and commercial banks. (1) Token-based vs account-based CBDC can be designed to be similar to cash, with CBDC tokens issued by the central bank and circulated electronically, with only a small amount re-deposited back to the central bank. This design would use some form of distributed ledger technology (DLT) to verify the token's chain of ownership and verify payment transactions without the direct involvement of a central bank or other clearing house. People's Daily Online "China's Blockchain Application Blue Book (2020)" was published: People's Daily Online, Beijing, December 2nd, planned by the People's Daily Online Blockchain Research Institute and published by the Social Sciences Literature Publishing House, the "Blockchain Application Blue Book: China's Blockchain Application Development Research Report (2020) (hereinafter referred to as the "Blue Book") was officially published today, and is currently on sale on major book sales platforms. (People's Daily Online - Blockchain) [2020/12/3 22:57:40] Another design is similar to a debit card, where individuals and businesses electronically deposit funds into central bank CBDC accounts or regulated depository institutions in a specially designated account. The central bank simply debits the payer’s CBDC account and credits the payee’s CBDC account to process each payment transaction. A key advantage of an account-based CBDC system is that payments can be made in real time and at no cost. Of course, when each CBDC account is initially created, it is necessary to obtain a license or open an account with a commercial bank to verify the identity of the account holder. Thereafter, payment transactions can be made quickly and securely (such as two-step verification using mobile phones and PINs), and the central bank can monitor any unusual activity and implement other anti-fraud safeguards if necessary. And token-based systems are more expensive to verify. The entire chain of ownership of each coin must be stored in an encrypted ledger (blockchain), and a copy of it must be stored on every node of the payment network. New payment transactions are collected into blocks and must be verified before being permanently added to the ledger. This verification process (called mining) involves highly complex and energy-intensive computational procedures. For example, in the case of Bitcoin, the miner's fee is approximately equal to 0.8% of the total value of the payment transaction. In fact, token-based CBDC may be better than the current payment system, but its efficiency is much lower than account-based CBDC. The establishment of an account-based CBDC can greatly improve efficiency. Compared with the current cash system, Barrdear and Kumhof (2016) pointed out that the adoption of CBDC can permanently increase real GDP by about 3%. Wang Xiaoyun, Academician of the Chinese Academy of Sciences: Blockchain and the Industrial Internet should be integrated and developed: Wang Xiaoyun, an academician of the Chinese Academy of Sciences, said today at the 2020 National Cyber Security Publicity Week that the Blockchain and the Industrial Internet should be integrated and developed. The Industrial Internet is not only related to national security, but also the lifeline of an enterprise, and even personal safety. At present, there are more than 500 companies in the United States, and 75% of the industrial Internet has or will integrate blockchain technology in 2020. Wang Xiaoyun said that the deployment speed is very fast, and he very much hopes that Shandong can deploy the industrial Internet blockchain technology in advance, which can make our country's industrial Internet more secure and efficient. ( [2020/9/14] (2) Account form The experience of Ecuador proves the feasibility of the central bank directly opening accounts to provide account-based CBDC; another way is to follow the method of Dyson and Hodgson (2017), by Regulated commercial banks provide CBDC to the public through designated accounts and hold corresponding funds in central bank reserve accounts. The Kenyan experience shows the feasibility and advantages of such public-private partnerships. It should be noted that CBDC does not have to monopolize the payment system, however, in the absence of CBDC competition, private networks may benefit from economies of scale and become quasi-monopoly. (3) The relationship between CBDC and banknotes The demand for banknotes has rapidly decreased in many countries around the world, but this trend is not uniform among different countries or household types, which brings great resistance to the rapid abolition of cash use. Instead, the central bank could promote the phase-out of cash through the widespread use of CBDC and a tiered fee schedule for transfers between cash and CBDC. Such as small and infrequent conversion, the lowest cost; and large frequent conversion, the cost is considerable. As discussed below, this fee structure is critical to ensuring that the continued existence of paper money does not limit the ability of central banks to reduce nominal interest rates to negative levels in response to severe adverse shocks. This design also facilitates individual freedom of choice and guards against tax evasion, money laundering, and other illegal activities. Voice | Wu Hequan, academician of the Chinese Academy of Engineering: Industrial Internet can apply blockchain technology: On September 7, "2018 (Third) China Industrial Internet Conference·Jiaxing Summit" was held in Jiaxing City, Zhejiang Province. Wu Hequan, academician of the Chinese Academy of Engineering and chairman of the Internet Society of China, said at the meeting that blockchain technology can be applied to the industrial Internet to form a multiple security mechanism in a decentralized state to ensure the safety and reliability of the industrial Internet. [2018/9/7] II. How does CBDC design promote its role as a secure store of value? Then examine how to enhance the safe value storage function of CBDC, that is, if the funds are stored in the CBDC account for a long time, what will be its value? Should CBDC keep its nominal value unchanged, should it anchor the generalized price level and keep its real value constant, or should it accrue interest like short-term treasury bonds? (1) There is a difference between public CBDC accounts with constant nominal value and central bank reserves (usually interest-bearing) of commercial banks. When the nominal interest rate is positive, residents and enterprises have the incentive to minimize the amount of funds held in CBDC accounts, so the total amount of CBDC may Relatively small. As in current practice, the central bank can implement monetary policy by adjusting short-term nominal interest rates, but its ability to bring nominal interest rates below zero is severely limited, as savers can readily transfer funds to a zero-interest CBDC, in times of weak aggregate demand and When deflation persists, the central bank may have to rely on other means such as quantitative easing or government fiscal stimulus to stimulate aggregate demand and thus push the price level back to its target level. Within the aforementioned constraints on monetary policy implementation, it is reasonable to maintain or even expand inflation buffers to mitigate the severe impact of lower bounds on nominal interest rates. If the central bank targets the price level (rather than the inflation rate), it might make more sense for the price curve to have a positive slope rather than a constant value. (2) Stable actual value From a technical point of view, CBDC indexation (with a generalized price index as an anchor) is quite simple. However, when the aggregate demand is suppressed and the real interest rate falls below zero, the compilation of the CBDC index will face great problems. At this time, financial market participants will transfer most of their assets to CBDC with zero real interest rate, and the zero lower bound of real interest rate constitutes a stricter constraint on monetary policy than the zero lower bound of nominal interest rate. Therefore, the central bank may rely heavily on other tools such as quantitative easing or fiscal policy to achieve the goals of promoting economic recovery and restoring price stability. Bai Shuo: Exchanges should operate with a license, and China has the ability to monitor Bitcoin technology: Bai Shuo, director of the technical committee of the "China Distributed Ledger Basic Protocol Alliance", believes that centralized virtual currency exchanges are still the mainstream, although there are also decentralized exchanges. It is a centralized exchange, but its performance cannot keep up. If you want to be efficient, you have to centralize it. If it is centralized, there is no guarantee for security, and the authenticity of transactions is also questionable. At this time, if there is no supervision, self-discipline alone will definitely not work, and supervision must intervene. The exchange should operate with a license, and at least be able to withstand audits in terms of anti-hacking and order fraud prevention. If it does not meet the standards of best practice in the industry, it cannot do this business. Although the Bitcoin account is anonymous, the account is open and transparent. According to the clues of the account account behavior, combined with some artificial intelligence monitoring technology, it is possible to screen out the illegal money laundering account. This is entirely possible . From a technical point of view, China certainly has the ability to monitor Bitcoin. [2018/4/2] (3) Interest-bearing CBDC Paying interest on CBDC may greatly enhance the competitiveness of the banking system. In a growth economy with stable price levels, CBDC interest rates are usually positive. However, when the economy is severely downturned and the overall price level is driven down, unlike the current practice of zero-interest cash that severely limits the ability of the central bank to lower policy interest rates (such as the bank panic in the early 1930s), the central bank lowers interest rates under the CBDC system to promote economic recovery and Price stability is possible. The aforementioned constraints on monetary policy can be removed by establishing a progressive fee schedule for transfers between cash and CBDC. Imposing high fees on large or frequent transfers will prevent investors from converting to cash during periods of negative nominal interest rates. Therefore, the CBDC interest rate can be used as the main tool of monetary policy. In addition, there is no longer any need to maintain a positive inflation buffer. 3. How can CBDC design facilitate its role as a stable unit of account? Providing a stable unit of account facilitates economic and financial decision-making by households and firms, such as determining wages and prices, consumer spending and saving decisions, and making financial contracts, while generalized price stability can only be achieved by properly setting monetary policy. Liang Dingbang, former chief advisor of the China Securities Regulatory Commission: virtual currency is not an investment product: According to, recently, Liang Dingbang, former chairman of the Hong Kong Securities Regulatory Commission and chief advisor of the China Securities Regulatory Commission, attended the 7th CFA China Investment Summit. When talking about the development of "virtual currency" in the future, Liang Dingbang believes that virtual currency is neither a security nor an investment product, but it is just trying to become a "currency". Whether it is circulated and recognized must also be based on credit. The problem solved by blockchain technology is that the content-zce recorded in the blockchain cannot be changed, and the authentication technology must also ensure that no tampering has been done. Now there are many problems with virtual currency. People who do ICO and issue virtual currency make people mistakenly think that it is an investment product, which brings trouble, because there is no credit behind it to support its value. The most important thing about virtual currency is to see whether it can be recognized as a medium of exchange. In addition, there is still a problem with the blockchain now that the longer the blockchain, the slower the authentication, so the blockchain itself needs a new design and structure, and the next step is to upgrade and adjust the structure of the blockchain itself . [2018/3/30] After the introduction of CBDC, the central bank can also continue to implement the positive inflation targeting system. With the elimination of the effective lower limit of the nominal interest rate, it will be feasible to establish real price stability. The monetary policy framework can ensure that the overall consumer price index anchored by the value of CBDC remains stable for a period of time. A large body of literature has analyzed the macroeconomic impact of anchoring price levels rather than inflation targeting, and the overall conclusion is that, if the policy framework is transparent and the commitment to price stability is credible, targeting price levels can bring significant macroeconomic stability benefits. Moreover, consistent with the subsequent analysis of optimal monetary policy and simple rules, the monetary policy stance should respond to real economic activity and price levels, and the literature generally describes such frameworks as flexible price-level targeting, which differs from current practice. different flexible inflation targeting regimes. Finally, it should be noted that a sudden shift from a positive inflation target to a stable price level target could have devastating effects on the economic and financial system, and the transition process needs to be carefully planned and managed. 4. Monetary policy framework under the CBDC system Monetary economists have reached a broad consensus that monetary policy behavior should be systematic and transparent in order to promote the monetary transmission mechanism and the effectiveness of the central bank. Enabling a CBDC provides a landmark opportunity to increase the transparency of a central bank's monetary policy framework, including its nominal anchors, tools and operations, and policy strategy. (1) Nominal anchors As mentioned above, the monetary policy framework should provide transparent nominal anchors to facilitate economic and financial decision-making by the private sector. In recent decades, the central bank has adopted a specific inflation target, and the transparency has improved significantly, but the target setting is somewhat subjective and arbitrary, and the debate on the specific target value may inadvertently damage the central bank's reputation. However, if interest-bearing CBDC is adopted, the central bank can establish a constant price level target, which can serve as a durable and reliable nominal anchor. (2) Tools and operations The CBDC interest rate will become the main tool of monetary policy accordingly, especially as it allows policymakers to lower the policy interest rate below zero, and the central bank's balance sheet and operating procedures may become highly transparent. Finally, the central bank still needs to retain its function as lender of last resort, but it is crucial to have appropriate legal protections in place to ensure that the central bank's lender-of-last-resort role does not impair its ability to meet its price stability commitments. (3) Monetary policy strategy The central bank's monetary policy strategy referred to in this paper, one method is to specify the price level target rule, which can be expressed by the deviation between the price level and the target value and the deviation between economic activities and its potential target. This approach is likely to be feasible and effective where central banks have a clear understanding of the monetary policy transmission mechanism (i.e., the setting of policy rates and the dynamic relationship between price behavior and real economic activity). But the practice shows that the current understanding of macroeconomic dynamics has shortcomings and limitations. Another method is simple rules. The simple rules of CBDC interest rate adjustment are similar to Taylor rules, but aim at stabilizing the price level rather than stabilizing the inflation rate. Like the Taylor rule, this rule can be interpreted as a basis for adjusting real interest rates in response to economic activity and price fluctuations. Specifically, when the price level is at the target level and output is at the potential level, the ex post real interest rate should be equal to the equilibrium value, which may reflect the historical average real interest rate (such as the Taylor rule), or can be set as the professional forecaster's Median estimate (eg Levin, 2014).


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